Employment report: Construction employment could fall precipitously

A statistical model based on ADP estimates suggests that construction employment could fall another 246,000 by the fourth quarter of 2008

July 17, 2007 |

This article is based on data developed by Macroeconomic Advisers, LLC using previously unpublished data derived from the ADP National Employment Report.

According to estimates from the Bureau of Labor Statistics, by June of 2007 employment in the construction industry had fallen only 44,000 from a cyclical peak reached last September, despite major contractions in other measures of construction activity

A statistical modeling based on these official estimates suggests that construction employment could fall another 246,000 by the fourth quarter of 2008

However, previously unpublished data used to develop the ADP National Employment Report¹ (sponsored by ADP®, developed and maintained by Macroeconomic Advisers, LLC) suggest that by June of 2007 construction employment might already have declined by as much as 156,000 from a peak reached in April of 2006, so that further declines through the end of 2008 should prove manageable

According to data used to develop the ADP National Employment Report, the largest percentage declines in employment have occurred in medium- and large-sized construction companies

One of the most intriguing empirical puzzles presented of late by the U.S. economy is the apparent disconnect between measures of output and employment. Over the four quarters ended in the first quarter of 2007, real GDP advanced just 1.9%, a pace normally associated with a rising unemployment rate. Yet, the civilian unemployment rate has fallen from 4.8% in February 2006 to 4.5% in June of this year. True, establishment employment has decelerated, but to a growth rate that is still “above-trend.” In the spring of 2006, the six-month annualized percent change in establishment employment was 2.1%. By June of this year, it had slipped to 1.3%, but this was still faster than typical projections for growth in the labor force. In no industry does this disconnect seem more striking than in construction. Typical “straw” commentaries note that starts of private single-family homes, which peaked at 1,837,000 in January of 2006, have since plummeted 36% to 1,170,000 in May of this year. Yet employment in the construction industry peaked at 7,725,000 last September and has fallen a mere 0.6%, to 7,681,000 in June. This discrepancy has caught the attention of the press as well as economists and financial analysts, many of whom: (a) anticipate an eventual large decline in construction employment, (b) argue that there may already have occurred a substantial decline in the employment of undocumented workers (e.g., illegal immigrants) in the construction industry that has gone unreported to the BLS; (c) suspect that the official statistics for employment in the construction industry are biased upwards by a faulty “birth/death adjustment” applied by the BLS. If the recent birth/death adjustment is biased upward, there could occur a downward revision to recent construction employment when, early next year, the BLS extends its annual benchmarking from March of 2006 to March of 2007. Such a revision might align construction employment better with other measures of real activity in the industry.

In the Macroeconomic Advisers, LLC (MA) Macro Focus report titled What’s “Up” With Construction Employment, MA examines the disconnect between construction activity and employment in the industry, and use previously unpublished data from the ADP National Employment Report²to conclude that construction employment likely has declined more to date than shown in the official government statistics. Given MA’s modeling of construction employment and their forecast of construction spending, the analysis suggests that over the next year and a half construction employment might decline approximately 250,000 below recent official estimates, but a smaller 160,000 below the current level suggested by the data from the ADP Report. Either figure is consistent with MA’s forecast of a modest rise in the national unemployment rate by early next year.

To see the full Macro Focus report, What’s “Up” With Construction Employment Report,click here